A collection of observations, news and resources on the changing nature of innovation, technology, leadership, and other subjects.

April 23, 2007

The Life Cycle of a Business

As I near retirement from IBM at the end of May, I have been thinking a lot about the institution that I have spent 37 years in, and more generally, I have been reflecting on the intrinsic nature of the world of business in which I have lived all these years.

What is a business - anyway? As usual, Wikipedia offers a pretty good definition: "In economics, business is the social science of managing people to organize and maintain collective productivity toward accomplishing particular creative and productive goals, usually to generate profit." Not surprisingly, as is the case for any highly complex system or entity, this is just one of multiple definitions.

In quantum mechanics we learn that questions like "what is an electron?" are meaningless unless one also asks "what is your purpose in asking this question?" An electron is sometimes best thought of as a particle, and sometimes best thought of as a wave depending on what models or measurements one is after. Similarly, one cannot separate asking what a business is from how one wants to use the answer. But I am actually most satisfied with the people-centric definition Wikipedia gives, because I truly believe it is the most important one.

If you look at complex systems as a kind of spectrum, with natural biological systems – e.g., living organisms, ecosystems and evolution - at one end and physically engineered systems - e.g., bridges, airplanes and microprocessors - at the other, organizational systems like business fall someplace in between. While business systems are clearly engineered, that is, designed, built and managed by people, they share many characteristics with biological systems, in particular, the need to be flexible and adaptable so they can evolve and survive as their environment changes.

Reflecting perhaps a somewhat morbid point of view, I am particularly fascinated by the number of once seemingly powerful companies that are no longer around. It is as if, like living organisms, a business is destined to disappear sooner or later, and a very large part of innovation and strategy is all about how to avoid the inevitable death of the organization. In the book she co-authored, Let go to Grow: Escaping the Commodity Trap, my colleague Linda Sanford cited a study demonstrating that of over one thousand companies tracked by the Fortune 500 since 1960, less than one sixth of them are still around.

It would appear that there is a kind of life cycle to a business, and beyond a certain number of years - a few decades, give or take - the invisible hand of the marketplace deems the business to be more valuable as a kind of carcass for fast growing new companies to feed on, rather than as an ongoing, viable institution.

I suspect that I come to my fatalistic views in large part because of the near-death experience that IBM went through in the early 1990s. This was a very painful time for me personally and for all of us in the company. I have also seen how many once mighty companies in the IT industry either disappeared altogether, e.g., Digital and Compaq, or became shadows of their former selves, e.g., Cray and Fujitsu. The IT industry may be a particularly tough battleground for companies because it is so fast-changing and competitive, but I suspect that similar dynamics are at work in many other industries, albeit with different life-cycle parameters.

It seems that the key for a company to stay alive, in spite of the odds and market pressures, is to have something in its basic culture - its DNA - that somehow keeps it going and enables it to adapt itself to wildly different market environments. You must have some unique and valuable talents, and the people in the company must be united by some kind of drive to succeed that transcends the individual products and services of the day, as well as the quarterly financial results.

Given my impending retirement, I have been thinking about IBM's long history, and wondering what it is that has enabled the company to survive the technology transition that almost did it in fifteen years ago. How come IBM is not only still around after almost one hundred years but continues to be a major leader in the IT industry?

I have concluded that IBM is at heart an IT-based systems company, that what it is really good at is designing, building and operating very complex IT-based systems that can then be applied to a variety of problems in industry and society. The kinds of complex systems IBM deals with require tremendous technical and organizational talents, not only in their design and development back in the labs but in helping clients apply them in their business as well as in providing them with all kinds of support services over the years. While the barrier to entry for any one specific component in IBM's portfolio may not be all that high, the barrier to entry for complex systems solutions with a span that encompasses their original conception in the labs, continuing client support over many years, and everything in between, is very large indeed.

I am sure that if one analyzes other companies that have similarly defied the odds, such as GE, which was originally founded in 1878, and Beretta, which is among the world's oldest corporations and has been owned by the same family for almost five hundred years, one will discover a similar unique inner essence and DNA, which in a subtle way provides a formidable barrier to the hungry competitors that surround them. It is particularly heartening that when all is said and done, the survival of organizations is not dependent primarily on their technology or financial results – but mostly upon very human qualities like culture, talent and a will to live.

Comments

Dear Irving, as usual, your ideas in your blog, and whenever I've been privileged to see you in 3-D, are wise; I'm commenting here, though, particularly on the first line of this post, about your imminent retirement.

When I joined IBM's Internet Division in 1996, I posted a whimsical photograph of you from "Wired" magazine on my wall as inspiration, and it has traveled with me to every office I've inhabited since then, even as I've gone on to work in a range different of divisions and business units.

In my experience, you have always been, in parallel, among the most brilliant and most humane of IBM senior leaders. I'm smiling, recalling your dialogue with Robert Redford onstage at PartnerWorld a few years ago.

And I'm smiling especially, recalling your agreement to be the kickoff speaker in a series eight years ago on How to Be an IBM Leader, where the company's employee diversity network groups co-sponsored the series on leadership tips by IBM leaders from historically-underrepresented groups.

When Maria Hernandez and I met with you prior to the talk, you asked, "What would be helpful for me to say to your [gay, lesbian, bisexual and transgender (GLBT)] constituency, Sarah?"

"Just say the words somewhere during your talk. It will be powerful for the GLBT people in the audience to hear a senior leader being explicitly inclusive."

And you did, and it was!

As a bonus, your blog helped inspire me to launch mine....I guess the 2-D version of you has inspired me as much as the 3-D version. Thank you for your continued inspiration and I wish you further great adventures in your emeritus role.

I am current doing my thesis on IBM's 3D Internet & Virtual Business Opportunity EBO, where the introductory section on business cycles might interest you. Furthermore, the excellent works of Clayton Christensen "The Innovator's Dilemma & The Innovator's Solution" give insight to business cycles from a perspective of low-end disruptive among others.

Your post about life cycles of businesses are almost up the ally of Schumpeter and his book Business Cycles (1936), and creative destructions of innovation that an invention unleashes from those affected in the environment. Business Cycles is a mammoth work and covers the rise and fall of several industries in the U.S., UK, and Germany.

There are other economic cycle theorist too which you might have read, though I am not an economist, I would encourage you to do so.

There is academic research going back 30 years that considers businesses as entities in an ecological system. The first in the is steam is Hannan, M. T. and J. Freeman (1977). "The Population Ecology of Organizations." American Journal of Sociology 82(5): 929-963. It is interesting that you reached a similar conclusion independently.

I think that the the last three words of your essay that cite the "will to live" are central to IBM's long term success. Whether you know it or not, The Will to Live is close to Nietzsche's Will to Power -- a philosophical concept outlined in Thus Spake Zarathustra. Nietzsche described the secret to longevity as the self awareness required to destroy that which you have created and re-deploy the proceeds in that which has yet to be invented. Others, like the Autrian economist Joeseph Schumpeter, talk about creative destruction and how out of a self-imposed transformation --a process that is never ending-- comes radical innovation. This is precisely what IBM has done so brilliantly --it is what explains its unusual longevity. Family business --the area that I write and give public lectures, lack this transformational drive. The act of gifting a business to succeeding generations destoys the Will to Power -- destroys radical transformation as gifted assets are treated like family heirlooms --never to be changed. The second and third generation business almost always destroy themselves without purpose as they give rise to what I describe as a "curator class" of owner managers. The enevitable death of these businesses lack intentionality and sadly reflect, hubris and entitlement --qualities seldom if ever culturally engrained in non-family businesses like IBM.

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Business in not a limited field. It has unlimited and uncountable branches. Every person has his own aspect of describing business. For example some person describe business as a way to generate revenue some says business is a life blood of this society and millions of other concepts exist. I enjoyed reading your 37 years experience. Great !!